In a familiar ritual, all eyes will be on the Fed next month to see if it raises interest rates, after Atlanta Federal Reserve Bank president Dennis Lockhart said he thought conditions looked favorable for an increase. But hold on—let’s take two steps back and ask why markets are so obsessed with the Fed’s potential quarter-point moves, and while we’re at it, why the U.S. economy is still growing slowly and why employment isn’t nearly as strong as the 4.9% unemployment rate makes it look. And lest you wonder where I’m going with this, the answer is that leadership failures are the explanation.
We’re all fixated on the Fed because monetary policy has become, as Mohamed El-Erian says, the only game in town. (That’s the title of his new book.) Governments worldwide have decided that printing money and cutting rates is the pain-free path to economic growth, except it isn’t working. Monetary policy has never been more than a temporary fix, and after eight years it has long since run out its string. It isn’t working anymore because it can’t.
So what’s the solution? It’s a range of government policies that have always been the foundation of a growing economy but that Washington has been utterly unable to enact. That’s the critical leadership failure, and that failure is why monetary policy is the only game in town, and why the economy remains weak. For example, everyone in both parties knows the economy would benefit substantially if U.S. companies could bring back some of the $2 trillion they hold overseas and invest it here. But tax law makes such a move economically crazy for them. Fixing the law would require a broad rewrite of the tax code, which is more than Washington leaders can even approach. So it doesn’t happen, and the trillions stay overseas.
How about something much simpler, like enacting a federal budget? We used to do that regularly. Not anymore. The odds don’t look good for this year, even though President Obama and then-House Speaker John Boehner made a budget deal last fall. The reasons for continued inaction are insanely convoluted, but the bottom line is that the government may well be funded by continuing resolutions, short-term funding measures for individual programs or departments. Result: No one affected by the budget, including many businesses, can make long-term plans—another block to investment.
There’s so much more. Free trade is good for the economy, but one thing Donald Trump and Hillary Clinton agree on is that the Trans-Pacific Partnership is an abomination that must be killed, so its chances of ratification, at least pre-election, have shrunk to zero. Finding money for badly needed infrastructure, at a time when the Treasury can borrow money at the lowest rates in history, would seem a no-brainer. But too much of such funding ends up in boondoggles like Alaska’s bridge to nowhere or Pennsylvania’s John Murtha Airport (now called “the airport to nowhere”). The futility of attempting immigration reform is obvious as soon as you say the words.
Those are some of the policy fixes that help an economy grow, but for now they all look impossibly distant. That’s why the Fed is the only policymaker left to watch and why the public has actually said it likes colonoscopies better than Congress. It’s a non-partisan issue. At least for now, the critical mass of leadership just isn’t there.
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What We’re Reading Today
One Brussels suspect arrested
According to reports out of Belgium, a third attacker thought to be named Najim Laachraoui has been arrested by Belgian authorities. The two other assailants were suicide bombers and have been identified as brothers Khalid and Brahim el-Bakraoui. The two men were known to Belgian authorities. BBC
Trump, Clinton take Arizona but…
…lose in Utah. Donald Trump won in Arizona with 47% of the vote. However, it’s in Utah, where Ted Cruz walked away with 69% of the vote, that has brought hope to anti-Trump backers. Since Cruz commanded more than 50% of the vote, he receives all 40 of Utah’s delegates. On the Democratic side, Hillary Clinton‘s 58% control of Arizona means that even though Bernie Sanders won in Utah and Idaho with almost 80% of the vote in both states, the gap between the two candidates’ delegate count hardly changes. NYT
Starbucks to donate unsold food
Howard Schultz‘s company is teaming up with the Food Donation Connection and Feeding America to donate unused food in the U.S. This is expected to bring an estimated 5 million meals to the nation’s hungry over the first year. Starbucks had long donated some of its food, but it hadn’t devised a way to deliver perishable goods. Now, the FDC will pick up the food, while Feeding America will distribute the goods. Fortune
Brazil President: “I will never resign”
Despite ongoing impeachment proceedings and an investigation into corruption at the state-run oil company, Petrobras, which has embroiled her inner circle, President Dilma Rousseff said that she has not committed a crime. She also called the impeachment proceedings a coup attempt. The call for Rousseff to step down by opposition party members and millions of Brazilians have come as the scandal has taken focus away from the worst recession Brazil has faced in decades. Reuters
Building a Better Leader
Supreme Court backs workers versus Tyson
In a class-action suit, workers in an Iowa plant claimed that Tyson should pay them $5.8 million for putting on safety gear, using statistical data to estimate how much time it takes each day. US News & World Report
About a third of the gender pay gap…
…can’t be explained by economists. It could be bias or workplace data holes. Fortune
Then you probably need more structure. First disconnect, then schedule some time in the day specifically for you. Quartz
The downside for Apple as the FBI steps back
While Apple and Tim Cook are likely thrilled to hear that the FBI has turned to a third-party source to hack the iPhone of one of the San Bernardino shooters, it also means there’s a security gap that Apple may not have known about. And unlike other tech firms, Cook hasn’t instituted a hacker policy to pay third-parties for providing information on holes they find. This leaves hackers with little incentive to hand over the blueprint. WSJ
Merck wins multi-billion dollar patent dispute with Gilead Sciences
Kenneth Frazier‘s Merck sued Gilead for including an active ingredient, sofosbuvir, in two of Gilead’s blockbuster Hepatitis C drugs. The two drugs—Sovaldi and Harvoni—brought in over $19 billion last year for Gilead. Merck claimed the use of sofosbuvir was protected under its patent. Earlier this year, Merck’s own Hep-C drug was approved by the U.S., which it has priced under Harvoni, creating a race to secure sales. ABC News
Amazon sues new Target executive
The online retailer has filed suit against Arthur Valdez, trying to prevent him from starting his new job at Target. Valdez worked for Amazon for 16 years, but Jeff Bezos‘ company says that an agreement Valdez signed in 2012 prevents him from working with a competitor for 18 months after leaving. Amazon claims Valdez would use confidential information about its own supply chain in his role at Target. Amazon did not name Target in the suit. Fortune
Up or Out
Snapchat hired Ali Rana as head of its audience and brand solutions and Gunnard Johnson as head of quantitative ads research. Fortune
Fortune Reads and Videos
Google expands Android Pay to the UK
But it’s still playing catchup with Apple. Fortune
Here’s how Facebook is expanding Facebook Live
The head of the initiative, Fidji Simo, says the difference between Facebook’s live streaming tool and competitors is the size of the social media platform’s audience. Fortune
Jeb Bush just endorsed Ted Cruz
Why? He’s not Donald Trump. Fortune
Sarah Palin signs deal to become a TV judge
She wants to become the next “Judge Judy,” without the law degree. Fortune
Quote of the Day
“The enormous size of the verdict is chilling to Gawker Media and other publishers with a tabloid streak, but it is also a flag to higher courts that this case went wildly off the rails.” — Nick Denton, founder of Gawker Media, discussing the verdict in its civil case against Hulk Hogan. A jury awarded Hogan $140 million due to a privacy breach by publishing a sex tape that included Hogan. Fortune
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